Fortum supports the European Commission’s efforts to clarify rules on State Aid in the energy and environmental field

The European Commission published a proposal on State Aid guidelines that set legally binding criteria for capacity mechanisms and renewable energy production support schemes on 18 December 2013. We support the Commission’s proposal to minimise the distortive effect of support schemes and capacity payments on the markets by creating common, European-wide criteria for them.

National renewable energy support mechanisms that differ from one another have caused challenges for the functioning and development of the EU’s electricity markets. While renewable energy production and investments based on support schemes and various other preferential treatments have depressed electricity wholesale market prices throughout Europe, consumers are paradoxically paying constantly increasing prices for their electricity. At the same time, the regulating power necessary to balance the intermittent supply of renewable energy has become unprofitable, and this capacity is in jeopardy of being shut down unless it starts receiving capacity payments.

Europe is, thus, now trying to patch the negative effects of one support form with new support forms. The Commission’s guidelines will help to harmonise the jungle of support systems and create a framework where the underlying principle of the internal energy market doesn’t completely collapse. The aim is to minimise the negative market effects of the increased share of renewable energy, which, as such, is seen positive.

Fortum supports the Commission’s premises to develop subsidy systems that are more market-driven

We support the Commission’s premises to a more market-driven development of renewable energy subsidy systems. It is important that instead of fixed aid, which in some cases is disproportionate, renewable energy subsidies are tied more closely to the electricity wholesale price and preferential market treatment of renewable energy comes to an end. We believe that a technology-neutral approach and opening national support schemes to companies in other EEA countries support the achievement of climate targets in the most economical way to society and customers.

Capacity adequacy at a regional level may become a problem, due to the rapid increase of renewable energy production that is intermittent by nature. However, it is important, as stated in the proposed guidelines, that possible capacity mechanisms are based on the careful consideration of their need, are technology-neutral, and do not discriminate between new or old production plants. Additionally, capacity mechanisms must be accessible to participation from plants in other countries.

Background information:

What changes will the Commission’s guidelines bring to State Aid?

The guidelines define revisions to e.g. the subsidies on renewable energy production as well as conditions for creating capacity mechanisms. A few main points of the proposal are:

Bidding processes for renewable energy subsidy systems

In the proposed guidelines, rather than fixed feed-in tariffs, the national renewable energy subsidy systems must be based on competitive bidding processes that are also open to companies in other EEA countries.

Increased competition of renewable energy production subsidies

The proposed guidelines and the rules targeted to renewable energy production would differentiate so-called mature technologies and immature ones. In both cases, the granting of subsidies would be based on a bidding process, in which all technologies would have an equal opportunity to participate.

The production aid schemes should in principle be open to other EEA countries to participate. It is also required that the fixed feed-in tariffs are replaced by the so-called premium tariffs, which reflect the market price. The same marketing and network balancing obligations would apply to producers of renewable energy than other participants in the market. The aid can be paid until the investment is amortized in accordance with the normal rules for calculation. Member countries, however, have the possibility not to apply many of the proposed obligations if they can present a justified reason.

Pre-conditions for capacity mechanisms

As a starting point the guideline has a negative attitude towards the introduction of capacity mechanisms, which could have a negative impact on the functioning of markets, and are contrary to the intention to give up fossil fuel subsidies. Capacity mechanisms must therefore be based on a verified need and the aid must be limited to the usability of the capacity. Also, they should not encourage to invest in new fossil energy production. The guidelines regard open and technology-neutral tendering as the least market distorting procedure. Capacity mechanisms should in principle be open to both existing and new technologies.

Possibility to support biomass-based production after investment costs

Production based on biomass differs from other technologies so that investment costs are usually relatively low but variable costs high. Therefore, the proposed guideline allows aid to biomass-based production under certain conditions, which can be supported even after the investment has been amortized. The aim of this aid is to compensate the price difference between biomass-based and fossil fuel.

What will happen next?

There is a six-week consultation period for the proposed guidelines. The final State Aid guidelines will be published before summer 2014 and will be in effect until the end of 2020.

When the guidelines take effect, member states have one year to revise the existing support schemes to conform to the new rules. However, the member states must follow the guidelines only when they amend their existing subsidy schemes.